OUTLOOK: Fed could cut by more than 50 points as markets fall sharply

WASHINGTON (AFX) - The FOMC could cut interest rates by 75 basis points, or perhaps even more, at its meeting next week in an effort to sustain investor confidence in the face of the very heavy losses on the stockmarkets, analysts said. "I think there is a very good chance they will move more than 50 basis points," said Russ Shelton, economist at Nesbitt Burns. Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc, said "any thing less than 75 basis points will be a disappointment." Joel Naroff, economist at Naroff Economic Advisors in Philadelphia, said he would not even rule out a full percentage point rate cut. At the moment, the Fed funds rate stands at 5.5 pct, following two 50 points rate cuts in January. Analysts remain very cautious in their forecasts and stressed that predictions of the size of the rate cut are changing daily in line with the latest developments in the markets. At the same time, they said Fed must address the stockmarket's problems given that the psychological impact of any rate cut on is now just as important as any economic impact. Federal Reserve board chairman Alan Greenspan "has got himself into a bind. Now, he's actually doing what he doesn't want to do -- react to changes in equity markets. He's sent a signal that he will do that and now he is going to have to," Naroff said. Robert McGee of Tokai Bank said "Fed officials know that the stock market -- even at these levels -- is overvalued and they know there is not much they can do to change that." However, the key issue is consumer confidence and spending. "I think the (FOMC) would like to do something where the market would be satisfied in the first place and (that they would) not have to look panicky" by moving again in the next few weeks after the meeting, McGee said. Analysts said that Fed officials, in their recent public speeches, offered no hint that they were contemplating a rate cut of more than the 50 basis points, which was the consensus forecast before the latest heavy losses in the markets. Instead, Fed officials offered generally positive assessments of the economic outlook, with the current inventory correction likely to be over soon. Analysts also noted that the Fed did not react a few weeks ago when financial markets were pressing for another inter-meeting rate cut. "I think (the Fed) felt that they can't respond every time the stock market (falls) and decides that (it) needs to be bailed out by further easing," Shelton said. This time is different, however, because "there is a wealth of anecdotal evidence that the decline in high-technology capital spending is much more severe than (previously thought)," Shelton said. "Once that's clear, you have to ask, why wait," Shelton said.

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